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Republican ETFs: Contrary To Popular Opinion

08 November 2010 at 11:41 am by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

Financial journalists, bloggers and wannabes have chimed in on the stock market implications of the Republican landslide. Unfortunately, many writers offered up ETF picks that arrived a little late to the idea table.

For instance, with the Republicans taking over the U.S. House of Representatives, many are now touting oil-related investments. I don’t¬†disagree.¬†After all, the energy sector isn’t threatened by cap-n-trade legislation and the Fed’s QE2 reflates the price of crude.

At the same time, might there have been a little more foresight? The Republican takeover over the House had been anticipated for several months, as was the Federal Reserve’s plans¬†to buy treasuries with¬†previously non-existent dollars. These reasons contributed to my 8/18/10 feature,¬†“3 Reasons Oil-Related ETFs Will Outperform.” In it, I¬†explained how government policies¬†would likely benefit funds like¬†Oil Services¬†HOLDRs (OIH) and oil exporting corporations in Claymore Guggenheim Frontier Markets (FRN).

This has nothing to do with prediction; rather,¬†the markets¬†were already anticipating the Republican tidal wave as well as additional monetary easing. In other words,¬†money mangers like myself were already “buyers” in¬†September and October,¬†nurturing an environment for stock price appreciation.

Once more, I don’t believe that the ride on the energy express in over.¬†Funds like SPDR S&P Oil and Gas Exploration (XOP) should still outperform the S&P 500.¬†Last week, in fact, I chronicled¬†Energy ETF improvement¬†in “Put¬†A Tiger In Your Portfolio’s Tank.”

On the other hand, investors may want to think twice about other popular notions about the Republican “tsunami.”¬†Here are several thoughts that run counter to prevailing commentary:

1. SPDR Select Health Care (XLV) Will Still Underachieve. I’ve seen a number of features¬†express¬†that Republican commitment to repealing¬†“ObamaCare,” or even modifying it,¬†will make the sector more attractive. As if the current health care legislation¬†isn’t ridiculously complex¬†to understand or implement, more legislative wrangling only adds to¬†the sector’s uncertainty.¬†Markets and market segments hate uncertainty more¬†than they hate¬†a clear-cut regulatory environment.

2. Defense Stocks¬†Will Be Average Performers At Best.¬†¬†It’s true that the primary purpose of the U.S. Government is to provide for the common defense.¬†Yet unless a terrorist attack occurs on American soil, it’ll be near impossible for government spending to increase here. With tax cut extension being a top Republican priority,¬†60% entitlement spending entirely untouchable, and additional dollars going to ObamaCare, where will the cuts take place?

While Republicans may be able to maintain defense expenditures, this is a sub-sector that relies entirely on the government. It follows that funds like PowerShares Aerospace and Defense (PPA) may do “okay” if demand for non-defense-related aerospace is strong.

For my part, however,¬†these so-called “Republican ETFs” are not the way¬†to capitalize on¬†Fed “reflation”¬†nor¬†a pro-business Congress. Instead, look to beneficiaries of a Fed-weakened¬†U.S. dollar, such as Chinese consumers in Global X Chinese¬†Consumer (CHIQ). Or you can look at Congressional support¬†for the heartland via¬†exporters of agricultural products in Market Vectors Agribusiness (MOO).

You can listen to the¬†ETF Expert Radio¬†Show¬†‚ÄúLIVE‚ÄĚ,¬†via podcast or on your iPod.¬†You can review more ETF Expert features here.

Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert disclosure details here.

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